bluebooks · October 31, 2005
Bluebook
Prefatory Note
The attached document represents the most complete and accurate version available
based on original files from the FOMC Secretariat at the Board of Governors of the
Federal Reserve System.
Please note that some material may have been redacted from this document if that
material was received on a confidential basis. Redacted material is indicated by
occasional gaps in the text or by gray boxes around non-text content. All redacted
passages are exempt from disclosure under applicable provisions of the Freedom of
Information Act.
Content last modified 03/31/2011.
CLASS I FOMC - RESTRICTED CONTROLLED (FR)
OCTOBER 27, 2005
MONETARY POLICY ALTERNATIVES
PREPARED FOR THE FEDERAL OPEN MARKET COMMITTEE
BY THE STAFF OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Class I FOMC - Restricted Controlled (FR)
October 27, 2005
MONETARY POLICY ALTERNATIVES
Recent Developments
(1)
With investors putting only small odds on a pause in the tightening cycle
following Hurricane Katrina, there was little market reaction to the FOMC’s decision
at the September meeting to raise the target federal funds rate 25 basis points to
3¾ percent, to maintain its assessment that the risks to price stability and sustainable
growth were balanced, and to retain the “measured pace” language. 1 The expected
path for monetary policy shifted up in subsequent weeks though, as incoming data
indicated that output had been expanding briskly prior to the hurricane and that the
disruptions to economic activity from Hurricane Katrina and Rita were likely to be
less severe than initially feared. This upward pressure on interest rates may have been
amplified by comments from a number of Federal Reserve officials that were read as
stressing inflation concerns. By the time of the release of the FOMC minutes,
investors had reportedly anticipated their somewhat hawkish tone, and the market
response to their publication was minimal. Current readings on futures contracts
indicate that the federal funds rate expected after the December meeting has increased
about 25 basis points over the intermeeting period to nearly 4¼ percent, consistent
with investors placing high odds on a quarter-point rate hike at each of the next two
meetings (Chart 1).2 The level of the funds rate expected to prevail by June 2006 rose
Over the intermeeting period, the effective federal funds rate was close to the target. The
Desk purchased $4.2 billion of Treasury coupon securities and $2.7 billion of Treasury bills,
$1.5 billion of which were from foreign customers. The volume of outstanding long-term
RPs decreased $7 billion, to $11 billion.
2 Today is the first day of the maintenance period that includes the upcoming FOMC
meeting. Judging from the October federal funds futures contract, market participants
expect the funds rate to average about 17 basis points above the target, on average, over the
1
Class I FOMC - Restricted Controlled (FR)
Page 2 of 36
Chart 1
Interest Rate Developments
Expected Federal Funds Rates*
Probability of a 25 b.p. Tightening
at Upcoming FOMC Meetings*
Percent
Percent
5.0
120
September 19, 2005 (black)
October 27, 2005 (red)
October 27, 2005
September 19, 2005
100
4.5
80
60
4.0
40
3.5
20
0
3.0
Oct.
Jan.
2005
Apr.
July
2006
Oct.
Jan.
Apr.
2007
Nov.
Implied Volatilities
Percent
12
190
FOMC
Ten-Year Treasury (left scale)
Six-Month Eurodollar (right scale)
10
Jan.
Mar.
Nominal Treasury Yields*
Basis points
Daily
Dec.
*Estimated from federal funds futures.
*Estimates from federal funds and eurodollar futures, with an allowance
for term premia and other adjustments.
Percent
7
Daily
170
FOMC
Ten-Year
Two-Year
150
5
130
8
6
4
110
3
90
6
2
70
1
50
4
0
30
Jan.
Apr.
July
2004
Oct.
Jan.
Apr.
July
2005
Oct.
Jan.
Apr.
July
2004
Oct.
Jan.
Apr.
July
2005
Oct.
*Par yields from a smoothed nominal off-the-run Treasury yield curve.
Energy Prices
Dollars per barrel
75
70
65
60
55
50
45
40
35
30
25
20
Inflation Compensation*
Dollars per gallon
FOMC
Daily
4.0
FOMC
Daily
Five-to-Ten Years Ahead
Next Five Years
3.5
Spot WTI (left scale)
Spot Unleaded Gasoline* (right scale)
Percent
4.0
3.5
3.0
2.5
3.0
2.0
2.5
1.5
2.0
1.0
1.5
0.5
Jan.
Apr.
July
2004
Oct.
*Spot wholesale price of gasoline
Jan.
Apr.
July
2005
Oct.
Jan.
Apr.
July
2004
Oct.
Jan.
Apr.
July
2005
Oct.
*Based on a comparison of a smoothed TIPS yield curve to a smoothed
nominal off-the-run Treasury yield curve.
Note: Vertical lines indicate September 19, 2005. Last daily observations are for October 27, 2005.
Class I FOMC - Restricted Controlled (FR)
Page 3 of 36
50 basis points, to a peak just above 4½ percent. Respondents to the Desk’s latest
dealer survey have similarly come to expect more policy tightening, with the majority
now anticipating rate increases at the November, December, and January meetings.
Most of the respondents expect little change in the measured pace and
accommodative language, and six of twenty-two respondents indicated that recent
statements by Federal Reserve officials had influenced their interest rate forecasts.
Uncertainty about the expected path for policy over the coming six months, as
measured by implied volatility read from eurodollar options, has decreased some since
the September meeting, although it remains above its pre-Katrina levels.
(2)
Nominal Treasury yields rose 25 to 50 basis points on net, with most of the
advance accounted for by increases in near-term forward rates.3, 4 In addition to
stronger-than-expected economic data, declines in some energy prices likely
contributed to a more positive economic outlook, helping to push yields higher.
Increases at the longer end of the term structure, especially late in the period, may
have been due in part to increased mortgage hedging flows, as suggested by anecdotal
reports. Despite a higher-than-expected reading on the overall consumer price index
for September, TIPS-based measures of inflation compensation were about
unchanged over the intermeeting period, although they remain 15 to 20 basis points
above the levels seen prior to Hurricane Katrina.
(3)
Partly in response to the rise in interest rates, major stock price indexes fell
3 to 4¼ percent over the period (Chart 2). Although reported earnings for the third
quarter appear to have largely met or exceeded expectations, investors may also have
remaining days prior to the meeting. Federal funds futures contracts for December and
January are currently pricing in minimal year-end pressures in the federal funds market.
3 President Bush’s announcement on October 24 that he was nominating Ben S. Bernanke to
succeed Chairman Greenspan was accompanied by an increase of a few basis points in
Treasury yields and a modest rally in equity markets.
4 Open interest in the September ten-year Treasury futures contract remained elevated
through its final days of trading. Nonetheless, all the deliveries were met using the August
2012 note, which was the cheapest-to-deliver security.
Class I FOMC - Restricted Controlled (FR)
Stock Prices
S&P 500 Earnings Expectations Revisions Index
Index(12/31/03=100)
Daily
Page 4 of 36
Chart 2
Asset Market Developments
Percent
130
FOMC
Wilshire
Nasdaq
Monthly
4
S&P 500
S&P 500 excluding energy
120
3
2
1
110
0
MidOct.
100
-1
-2
90
-3
-4
80
Jan.
Apr.
July
2004
Oct.
Jan.
Apr.
July
2005
2002
Oct.
Implied Volatilities
2004
2005
Note. Index is a weighted average of the percent change in the consensus
forecasts of current-year and following-year EPS for constant sample.
Equity Valuation
Percent
40
Daily
2003
Percent
12
Monthly
FOMC
S&P 500
Nasdaq
10
30
8
12-Month Forward
Trend E/P Ratio
20
+
6
4
10
+
2
Real Long-Term Treasury Yield*
0
Jan.
Apr.
July
2004
Oct.
Jan.
Apr.
July
2005
0
1988
Oct.
2000
2004
Expected Defaults of Nonfinancial Companies
and Bond Default Rate
Basis points
Basis points
Percent of Liabilities
Percent of Outstandings
8
Daily
Ten-Year BBB (left scale)
Five-Year High-Yield (right scale)
160
1996
*Perpetuity Treasury yield minus Philadelphia Fed 10-year expected inflation.
Note. + Denotes the latest observation using daily interest rates and stock
prices and latest earnings data from I/B/E/S.
Corporate Bond Spreads*
200
1992
FOMC
1150 2.0
Monthly
7
Expected Defaults* (left scale)
Bond Default Rate** (right scale)
950
120
6
1.5
5
750
4
1.0
80
3
550
40
350
0
Sep
0.5
1
150 0.0
Jan.
Apr.
July
2004
Oct.
Jan.
Apr.
July
2005
Oct.
*Measured relative to an estimated off-the-run Treasury yield curve.
2
0
1999
2000
2001
2002
2003
2004
2005
*Firm-level estimates of year-ahead defaults from KMV corporation, weighted
by firm liabilities as a percent of total liabilities, excluding defaulted firms.
**Six-month moving average, from Moody’s Investors Service
Note: Vertical lines indicate September 19, 2005. Last daily observations are for October 27, 2005.
Class I FOMC - Restricted Controlled (FR)
Page 5 of 36
been concerned about the cautious tone to corporate guidance about future earnings
growth. Implied volatilities from equity options remained low but edged up a bit over
the period in response to several announcements of corporate distress, including the
sudden collapse of Refco, the bankruptcy filings by Delphi, Delta Airlines, and
Northwest Airlines, and the announcement of an SEC investigation into the pension
practices of General Motors (more details about the bankruptcies are provided in the
box “Credit Market Developments”). The timing of some of the bankruptcy filings
may have been related to the implementation of new bankruptcy rules in October. As
a result of the problems at these firms, the number of downgrades of corporate bonds
increased, as did the aggregate bond default rate. However, corporate quality outside
of the automobile and airline sectors remained solid. Broad indexes of investmentand speculative-grade corporate bond yields moved largely in line with Treasury yields
over the period, leaving spreads little changed.
(4)
The dollar’s foreign exchange value against major currencies rose about
¾ percent on balance over the intermeeting period (Chart 3).5 Somewhat strongerthan-expected U.S. economic data and the expressed resolve of U.S. officials to
combat inflationary pressures reportedly supported the dollar. A number of foreign
central bankers conveyed similar determination, heightening expectations of monetary
policy tightening abroad. In Canada, the Bank of Canada raised its policy rate another
25 basis points in mid-October, citing inflation concerns. In most major industrial
economies, yields on foreign long-term government securities rose a bit less than in
the United States. The dollar was little changed against the Canadian dollar and the
euro, but gained 1¼ percent against sterling and almost 3¼ percent against the yen.
Although recent Japanese data have been somewhat softer than during the first half of
the year, that economy apparently advanced further. Bank of Japan officials have
5
Class I FOMC - Restricted Controlled (FR)
Page 6 of 36
Credit Market Developments
Four high-profile companies—Refco, Delphi, and Delta and Northwest Airlines—
filed for Chapter 11 bankruptcy protection in the last six weeks; corporate bonds
with par value totaling slightly more than $8 billion were affected by these filings.
Refco, a large derivatives broker, collapsed when clients deserted the firm following
the revelation of accounting irregularities just two months after its initial public
offering. Delphi, the largest U.S. automobile parts manufacturer, cited its inability
to reach cost-cutting agreements with unions and with General Motors—from
which it spun off in 1999—as reasons for its filing. Competition from low-cost
carriers and soaring fuel prices were instrumental in the airlines’ defaults. Some of
these firms may have filed for bankruptcy more quickly than they otherwise would
have in order to avoid the corporate provisions of the new bankruptcy law, which
took effect on October 17.
Delphi’s bankruptcy filing rekindled investors’ concerns about credit quality in the
automobile sector—where spreads on several firms, including Ford and General
Motors, initially rose sharply and have since remained volatile. The airlines’
defaults, however, elicited little reaction, as they were largely expected. Refco’s
collapse had no discernible effect on financial market functioning, as its wind-down
was orderly and its accounting troubles were seen as isolated. Overall, the impact
of the bankruptcies on the broad credit market appears to have been limited. In a
sign that investors expect little spillover from the recent defaults, a measure of the
likelihood that future defaults in the investment-grade sector will be clustered—the
so-called implied default correlation obtained from CDS index tranches—has
remained extremely low. The equivalent measure for the speculative-grade sector
has picked up, but that increase reflects in part the considerable presence of
automobile-sector firms in the high-yield CDS index. Even with the recent
increase, investors apparently still judge the likelihood of correlated defaults among
speculative-grade firms to be lower than it was last spring.
Class I FOMC - Restricted Controlled (FR)
Page 7 of 36
Chart 3
International Financial Indicators
Nominal Trade-Weighted Dollar Indexes
Ten-Year Government Bond Yields
Index(12/31/03=100)
Daily
112
6.0
FOMC
Broad
Major Currencies
Other Important Trading Partners
Percent
Daily
UK (left scale)
Germany (left scale)
Japan (right scale)
110
5.5
2.5
108
106
5.0
2.0
104
102
3.0
FOMC
4.5
1.5
100
4.0
98
96
1.0
3.5
94
0.5
3.0
92
90
Jan.
Apr.
July
2004
Oct.
Jan.
Apr.
July
2005
Oct.
2.5
0.0
Jan.
Apr.
July
2004
Oct.
Jan.
Apr.
July
2005
Oct.
EMBI+ Index
Stock Price Indexes
Index(12/31/03=100)
Daily
145
FOMC
Basis Points
Daily
140
FOMC
Overall
Brazil
1000
900
135
800
130
UK (FTSE-350)
Euro Area (DJ Euro)
Japan (Topix)
125
700
120
600
115
500
110
105
400
100
300
95
90
Jan.
Apr.
July
2004
Oct.
Jan.
Apr.
July
2005
Oct.
200
Jan.
Apr.
July
2004
Oct.
Note: Vertical lines indicate September 20, 2005. Last daily observations are for October 27, 2005.
Jan.
Apr.
July
2005
Oct.
Class I FOMC - Restricted Controlled (FR)
Page 8 of 36
continued to hint that, given their economic outlook, the quantitative easing regime
will likely end during the first half of next year. Share prices in Japan made solid gains
during the intermeeting period, led by banking and other financial-sector stocks that
reacted positively to passage of the postal reform bill. Stock prices in other foreign
industrial countries recorded declines of 2 to 7 percent, broadly similar to those in
U.S. markets.
(5)
The dollar recorded a small gain against an index of currencies of our other
important trading partners over the intermeeting period. The dollar moved up
¾ percent against the peso, as the Bank of Mexico eased its overnight lending rate
25 basis points for the second time in recent months. The dollar continued on its
downward trend against the Brazilian real, and the Brazilian central bank surprised
markets with a 50 basis point easing of its policy rate to counter weakening domestic
demand. Equity prices in many emerging market countries dropped fairly sharply, as
investor demand for riskier assets appeared to abate with increases in U.S. interest
rates.
(6)
Domestic nonfinancial debt is estimated to have advanced briskly in the
third quarter, rising 8¼ percent on net (Chart 4). Growth in household debt appears
to have edged down in the third quarter owing to a slowing in mortgage debt growth,
although the forecast of the latter remains at an elevated level. Household
bankruptcies surged in the weeks immediately before bankruptcy reforms went into
effect on October 17. The debt of nonfinancial businesses appears to have risen in
the third quarter at a rate comparable to increases seen in the first half of the year. In
October, bond issuance has slowed as higher yields may have discouraged new longerterm issues. Commercial paper, which ran off at quarter-end, bounced back in early
October. Bank loans to businesses continued to advance briskly, and the results of
the most recent Senior Loan Officer Opinion Survey show some further easing of
lending terms and standards for such loans.
Class I FOMC - Restricted Controlled (FR)
Page 9 of 36
Chart 4
Debt and Money
Growth of Household Debt
Growth of Nonfinancial Debt
Percent
Percent, s.a.a.r.
Total
_____
Nonfederal
__________
8.1
7.6
Q1
Q2
Q3
Q4
9.3
7.2
8.5
8.1
8.6
6.8
9.0
8.4
Q1
Q2
Q3
9.7
7.3
8.2
8.7
9.0
8.9
2003
2004
2005
21
Quarterly, s.a.a.r.
p
18
Consumer
Credit
15
12
Q3p
9
6
Home
Mortgage
Q3p
3
0
-3
p Projected.
1991
1993
1995
1997
1999
2001
2003
2005
p Projected.
Household Bankruptcies
Thousands of filings
Weekly, n.s.a.
Changes in Selected Components of
Nonfinancial Business Debt
600
Monthly rate
550
500
450
$Billions
C&I Loans
Commercial Paper
Bonds
Sum
50
40
400
350
300
30
e
20
250
200
150
100
2003
2004
2005
10
0
50
0
Oct.24
60
-10
-20
2003
2006
2004
Q1
Q2
Q3
Oct
2005
Note. Commercial paper and C&I loans are seasonally adjusted,
bonds are not.
*Source. Visa Bankruptcy Notification Service.
e Estimated.
M2 Velocity and Opportunity Cost
Growth of M2
Percent
s.a.a.r.
10
8.00
Percent
Velocity
2.3
Quarterly
8
Opportunity Cost*
(left axis)
4.00
2.2
6
4
Q3
2.00
2.1
2.0
2
0
1.00
Velocity
(right axis)
Q3p
1.9
0.50
-2
1.8
0.25
-4
2003
2004
Q1
Q2
2005
Q3
1993
1995
1997
*Two-quarter moving average.
p Projected.
1999
2001
2003
2005
Class I FOMC - Restricted Controlled (FR)
(7)
Page 10 of 36
M2 expanded at an annual rate of 6 percent in September, bringing third-
quarter growth to 4 percent. The increase in September was in part attributable to a
surge in retail money market funds and to a boost to currency and liquid deposits
resulting from Hurricane Katrina.6 Growth in nominal output in the third quarter
likely exceeded that of M2, implying a further rise in velocity.
Through September, the Federal Emergency Management Agency had paid out about
$2 billion in the Gulf region, and insurance transfers are estimated to have been about
$1 billion, a portion of which will likely rest in liquid deposits for a time. The staff assumes
that by year-end, FEMA will have paid out about $6.5 billion and insurance companies will
have delivered nearly $9.5 billion as a result of the hurricanes.
6
Class I FOMC - Restricted Controlled (FR)
Page 11 of 36
Economic Outlook
(8)
The staff has revised down slightly its projection for real GDP growth since
the September Greenbook, as the rise in longer-term yields, drop in equity values, and
appreciation of the exchange value of the dollar over the intermeeting period
established a launching-off point for the forecast consistent with more financial
restraint than in the previous projection. The outlook is predicated on the same
cumulative amount of policy tightening, which brings the federal funds rate to
4¼ percent, but is now based on an assumption that the process of firming will be
completed this year, rather than in the middle of next year. At the time of the
September meeting, market participants had foreseen a little less tightening than the
staff; now they foresee somewhat more. As a result, bond yields are forecast to
decline slightly as investors’ expectations for policy gradually come into line with the
lower path in the staff outlook. As in previous forecasts, the stock market generates
risk-adjusted returns similar to those on fixed-income investments, while the foreign
exchange value of the dollar depreciates modestly. In the context of these financial
conditions and the impetus to spending from a burst of rebuilding in the Gulf region,
GDP grows a little faster than the 3 percent expansion of potential output next year
and a little slower than that pace in 2007. The unemployment rate in 2007 edges
slightly above the estimated NAIRU of 5 percent and the output gap widens a bit to
almost ½ percent. Core PCE inflation picks up to 2¼ percent next year, in light of
some pass-through to inflation expectations of recently elevated headline inflation.
However, falling energy prices help bring overall PCE inflation down from
3¼ percent this year to 2 percent in 2006 and 1¾ percent in 2007 and, along with a
little economic slack, pull core inflation below 2 percent in 2007.
Class I FOMC - Restricted Controlled (FR)
Page 12 of 36
Policy Alternatives
(9)
This Bluebook presents three policy alternatives for the Committee’s
consideration, summarized by the draft statements in Table 1. Under Alternative A,
the Committee would leave its target for the federal funds rate unchanged at
3¾ percent at this meeting; the statement emphasizes uncertainties surrounding the
economic dislocations of the hurricanes and associated effects on consumer and
business confidence, but still signals that remaining monetary policy accommodation
could likely be removed at a measured pace. Under Alternatives B and C, the
Committee would raise the target federal funds rate 25 basis points. Alternative B
retains much of the statement the Committee issued after its September meeting,
including the characterization that policy remains accommodative. Alternative C
takes a somewhat more aggressive tone and eliminates the balance-of-risks,
accommodative, and measured pace language.7
(10)
Although core inflation readings have been favorable in recent months,
Committee members may be concerned that, in light of some signs of sharply higher
near-term inflation expectations and reports of greater pricing power, elevated energy
and other costs threaten to pass through significantly to core price inflation. If the
Committee believes that a continued measured pace of policy firming will prove
sufficient to contain these inflationary pressures, it might be inclined to raise the target
funds rate another 25 basis points at this meeting and choose language as in
Alternative B. As seen in Chart 5, a 25 basis point increase in the target funds rate
would move the real funds rate into the range of rates estimated by the staff to be
broadly consistent with closing the output gap over the next few years. However, the
The box “Other Language Alternatives” at the end of this section considers other possible
modifications to the language. Given the wholesale changes proposed in the third row of
Table 1, we have not followed the usual practice of striking out deletions and bolding
insertions relative to the prior statement.
7
Class I FOMC - Restricted Controlled (FR)
Page 13 of 36
Table 1: Alternative Language for the November FOMC Announcement
Policy
Decision
Rationale
September FOMC
Alternative A
Alternative B
Alternative C
1. The Federal Open Market Committee decided
The Federal Open Market
Committee decided today to leave
its target for the federal funds rate
unchanged.
Elevated energy prices and
hurricane-related disruptions in
economic activity seem to have
slowed the growth of spending, set
back employment, and weakened
consumer and business confidence.
The persistence of such effects is
uncertain, but robust underlying
growth of productivity and
monetary policy accommodation are
providing support to economic
activity.
The Federal Open Market
Committee decided today to raise its
target for the federal funds rate by
25 basis points to 4 percent.
Elevated energy prices and
hurricane-related disruptions in
economic activity seem to have
temporarily slowed the growth of
spending and set back employment.
However, monetary policy
accommodation, coupled with
robust underlying growth in
productivity, is providing ongoing
support to economic activity.
Spending will also be boosted by
rebuilding efforts in hurricaneaffected areas.
The Federal Open Market
Committee decided today to raise its
target for the federal funds rate by
25 basis points to 4 percent.
The disruptive effects of recent
hurricanes seem likely to be
temporary, especially in light of
increased spending associated with
rebuilding efforts. Economic
growth continues to be supported
by robust underlying growth in
productivity.
High energy and other costs have
added to inflation pressures.
However, core inflation has been
relatively low in recent months, and
longer-term inflation expectations
remain contained.
The cumulative rise in energy and
other costs has added to inflation
pressures. However, core inflation
has been relatively low in recent
months, and longer-term inflation
expectations remain contained.
Core inflation and longer-term
inflation expectations remain
contained. However, high energy and
other costs have boosted near-term
inflation expectations and price
pressures, likely making further policy
firming necessary.
today to raise its target for the federal funds
rate by 25 basis points to 3¾ percent.
2. Output appeared poised to continue growing at a
good pace before the tragic toll of Hurricane
Katrina. The widespread devastation in the Gulf
region, the associated dislocation of economic
activity, and the boost to energy prices imply that
spending, production, and employment will be set
back in the near term. In addition to elevating
premiums for some energy products, the disruption
to the production and refining infrastructure may
add to energy price volatility.
While these unfortunate developments have
increased uncertainty about near-term economic
performance, it is the Committee's view that they
do not pose a more persistent threat. Rather,
monetary policy accommodation, coupled with
robust underlying growth in productivity, is
providing ongoing support to economic activity.
3. Higher energy and other costs have the
potential to add to inflation pressures.
However, core inflation has been relatively
low in recent months, and longer-term
inflation expectations remain contained.
4. The Committee perceives that, with
Assessment
of Risk
appropriate monetary policy action, the upside
and downside risks to the attainment of both
sustainable growth and price stability should
be kept roughly equal.
5. With underlying inflation expected to be
contained, the Committee believes that policy
accommodation can be removed at a pace that
is likely to be measured. Nonetheless, the
Committee will respond to changes in
economic prospects as needed to fulfill its
obligation to maintain price stability.
[no change]
With underlying inflation expected
to be contained, the Committee
believes that remaining policy
accommodation can be removed at
a pace that is likely to be measured.
Nonetheless, the Committee will
respond to changes in economic
prospects as needed to fulfill its
obligation to maintain price stability.
[no change]
[none]
[no change]
[none]
Class I FOMC - Restricted Controlled (FR)
Page 14 of 36
Chart 5
Equilibrium Real Federal Funds Rate
Short-Run Estimates with Confidence Bands
Percent
8
Actual real federal funds rate
Range of model-based estimates
70 percent confidence band
90 percent confidence band
Greenbook-consistent measure
7
6
5
4
3
50 b.p. Tightening
25 b.p. Tightening
Current Rate
2
1
0
-1
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Notes: The actual real federal funds rate is constructed as the difference between the quarterly average of the observed
nominal funds rate and the log difference of the core PCE price index over the previous four quarters. For the current
quarter, the nominal funds rate used is the target federal funds rate as of the Bluebook publication date.
Short-Run and Medium-Run Measures
Current Estimate
Previous Bluebook
1.9
2.4
2.3
1.9
2.3
1.9
Short-Run Measures
Single-equation model
Small structural model
Large model (FRB/US)
Confidence intervals for three model-based estimates
70 percent confidence interval
90 percent confidence interval
Greenbook-consistent measure
(0.7 - 3.6(
-0.2 - 4.5(
2.0
1.9
2.1
2.4
2.2
2.3
Medium-Run Measures
Single-equation model
Small structural model
Confidence intervals for two model-based estimates
70 percent confidence interval
90 percent confidence interval
TIPS-based factor model
(1.4 - 3.2(
(0.7 - 3.7(
2.1
2.0
1.85
1.59
Memo
Actual real federal funds rate
Notes: Confidence intervals and bands reflect uncertainties about model specification, coefficients, and the level of
potential output. The final column indicates the values for the current quarter based on the estimation for the previous
Bluebook, except that the TIPS-consistent measure and the actual real funds rate are the values published in the
previous Bluebook.
-2
Class I FOMC - Restricted Controlled (FR)
Page 15 of 36
Equilibrium Real Rate Chart: Explanatory Notes
The equilibrium real rate is the real federal funds rate that, if maintained, would be projected to return
output to its potential level over time. For the first three measures listed below, the short-run
equilibrium rate is defined as the rate that would close the output gap in twelve quarters given the
corresponding model’s projection of the economy. For the first two measures, the medium-run concept
is the value of the real funds rate projected to keep output at potential in seven years under the
assumption that monetary policy acts to bring actual and potential output into line in the short run and
then keep them equal thereafter. The TIPS-based factor model measure provides an estimate of market
expectations for the real federal funds rate seven years ahead. The actual real federal funds rate shown
in the chart employs the log difference of the core PCE price index over the previous four quarters as a
proxy for expected inflation, with the staff projection used for the current quarter.
Measure
Description
Single-Equation
Model
The measure of the equilibrium real rate in the single-equation model is based on an
estimated aggregate-demand relationship between the current value of the output gap and
its lagged values as well as the lagged values of the real federal funds rate. In light of this
model’s simple structure, the short-run measure of the equilibrium real rate depends only
on the recent position of output relative to potential, and the medium-run measure is
virtually constant.
Small Structural The small-scale model of the economy consists of equations for five variables: the output
gap, the equity premium, the federal budget surplus, the trend growth rate of output, and
Model
the real bond yield. Unlike the estimates from the single-equation model, values of the
equilibrium real rate also depend directly on conditions associated with output growth,
fiscal policy, and capital markets.
Large Model
(FRB/US)
Estimates of the equilibrium real rate using FRB/US—the staff’s large-scale econometric
model of the U.S. economy—depend on a very broad array of economic factors, some of
which take the form of projected values of the model’s exogenous variables. These
projections make use of several simple forecasting rules which are appropriate for the
three-year horizon relevant for the short-run concept but are less sensible over longer
horizons. Thus, we report only the short-run measure for the FRB/US model.
Greenbookconsistent
Measures of the equilibrium real rate cannot be directly obtained from the Greenbook
forecast, because the Greenbook is not based on a formal model. Rather, we use the
FRB/US model in conjunction with an extended version of the Greenbook forecast to
derive a Greenbook-consistent measure. FRB/US is first add-factored so that its
simulation matches the extended Greenbook forecast, and then a second simulation is run
off this baseline to determine the value of the real federal funds rate that closes the output
gap. The medium-run concept of the equilibrium real rate is not computed because it
requires a relatively long extension of the Greenbook forecast.
TIPS-based
Factor Model
Yields on TIPS (Treasury Inflation-Protected Securities) reflect investors’ expectations of
the future path of real interest rates, but also include term and liquidity premiums. The
TIPS-based measure of the equilibrium real rate is constructed using the seven-year-ahead
instantaneous real forward rate derived from TIPS yields as of the Bluebook publication
date. This forward rate is adjusted to remove estimates of the term and liquidity
premiums based on a three-factor arbitrage-free term-structure model applied to TIPS
yields, nominal yields, and inflation. Because TIPS indexation is based on the total CPI,
this measure is also adjusted for the medium-term difference—projected at 40 basis
points—between total CPI inflation and core PCE inflation.
Class I FOMC - Restricted Controlled (FR)
Page 16 of 36
Committee may believe that higher real interest rates and a bit more resource slack
will be required to contain inflation, making it appropriate to issue a statement
suggesting that more tightening is likely in store. Such a policy course might also be
favored if the Committee viewed the current rate of core inflation to be at or above
the upper limit of a range consistent with price stability. With most measures of labor
compensation posting moderate gains and some reversal of the runup in energy prices
in prospect, members may believe that remaining firming can be done gradually,
consistent with the measured pace language of Alternative B. While a policy hike at
this meeting would place the funds rate at the high end of the prescriptions of several
policy rules that are based on a 1½ percent objective for core PCE inflation, that is
only a matter of timing because those rules indicate a need for an even higher funds
rate by mid-2006 (Chart 6).
(11)
The Committee may wish to begin the rationale portion of the statement
for Alternative B by reaffirming the view that adverse effects of the hurricanes will
probably slow the pace of the expansion only temporarily. Robust underlying growth
in productivity may still be seen as a support for economic activity. The statement
could also note the boost to aggregate demand from increased private and public
spending associated with rebuilding efforts in hurricane-affected areas. While a
25 basis point move would place the funds rate at about the midpoint of the staff's
range of estimated equilibrium rates, the Committee may still prefer to characterize
policy as accommodative in light of the underlying strength of demand and upward
pressures on inflation. As for inflation, the Committee could cite indications, evident
in some producer prices and in surveys of near-term inflation expectations, that “The
cumulative rise in energy and other costs has added to inflation pressures,” while still
noting that “core inflation has been relatively low in recent months.” The
observation that “longer-term inflation expectations remain contained” may be seen
as appropriate to convey a balanced view of the inflation outlook.
Class I FOMC - Restricted Controlled (FR)
Page 17 of 36
Chart 6
Actual and Assumed Federal Funds Rate and
Range of Values from Policy Rules and Futures Markets
Percent
10
10
Actual federal funds rate and Greenbook assumption
Market expectations estimated from futures quotes
Shaded region is the range of values from rules 1a, 2a, 4, 5, and 6 below
8
8
6
6
4
4
2
2
0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Values of the Federal Funds Rate from Policy Rules and Futures Markets
2005
2006
Q3
Q4
Q1
Q2
Q3
4.22
3.97
4.07
3.82
3.48
3.23
3.88
3.63
3.63
3.38
4.08
3.83
3.99
3.74
3.85
3.60
4.59
4.09
4.30
4.05
4.23
3.98
4.92
4.17
4.62
4.37
4.53
4.28
5.10
4.10
3.43
3.38
2.79
3.29
3.65
3.78
3.24
3.92
3.79
3.91
3.68
4.02
3.92
3.61
4.25
3.85
3.54
3.46
3.97
3.95
4.35
4.25
4.55
4.25
4.58
4.25
Rules with Imposed Coefficients
1. Baseline Taylor Rule: a) π*=1.5
1. Baseline Taylor Rule: b) π*=2
2. Aggressive Taylor Rule: a) π*=1.5
3. First-difference Rule: b) π*=2
3. First-difference Rule: a) π*=1.5
3. First-difference Rule: b) π*=2
Rules with Estimated Coefficients
4. Outcome-based Rule
5. Greenbook Forecast-based Rule
6. FOMC Forecast-based Rule
7. TIPS-based Rule
Memo
Expected federal funds rate derived from futures
Actual federal funds rate and Greenbook assumption
Note: Rule prescriptions for 2005Q4 through 2006Q3 are calculated using current Greenbook projections for inflation
and the output gap (or unemployment gap). For rules that contain the lagged funds rate, the rule’s previous prescription
for the funds rate is used to compute prescriptions for 2006Q1 through 2006Q3. It is assumed that there is no feedback
from the rule prescriptions to the Greenbook projections through 2006Q3. The TIPS-based rule is computed using
average TIPS and nominal Treasury yields to date.
0
Class I FOMC - Restricted Controlled (FR)
Page 18 of 36
Policy Rules Chart: Explanatory Notes
In all of the rules below, it denotes the federal funds rate, πt the staff estimate at date t of trailing fourquarter core PCE inflation, (yt – yt*) the staff estimate (at date t) of the output gap, π* policymakers’
long-run objective for inflation, it-1 the lagged federal funds rate, gt-1 the residual from the rule’s
prescription the previous quarter, (yt+3|t – yt+3|t*) the staff’s three-quarter-ahead forecast of the output
gap, (Δ yt+3|t – Δyt+3|t*) the staff’s forecast of output growth less potential output growth three quarters
ahead, πt+3|t a three-quarter-ahead forecast of inflation, and (ut+3|t – ut+3|t*) a three-quarter-ahead forecast
of the unemployment gap. Data are quarterly averages taken from the Greenbook and staff memoranda
closest to the middle of each quarter, unless otherwise noted.
Rule
Specification
Root-meansquare error
1988:12005:3
2001:12005:3
Rules with Imposed Coefficients
1. Baseline Taylor Rule
it = 2 + πt + 0.5(yt – yt*) + 0.5(πt – π*)
.96a
1.04a
2. Aggressive Taylor Rule
it = 2 + πt + (yt – yt*) + 0.5(πt – π*)
.67a
.62a
3. First-difference Rule
it = it-1 + 0.5(Δ yt+3|t – Δ yt+3|t*)
.96a
.40a
.23
.25
.25
.27
.47
.64
.40b
.41
+ 0.5(πt+3|t – π*)
Rules with Estimated Coefficients
4. Estimated Outcome-based Rule
Rule includes both lagged interest rate and
serial correlation in residual.
it = .51it-1 + 0.49 [1.29 + 0.95(yt – yt*)
5. Estimated Greenbook Forecast-based
Rule
Rule includes both lagged interest rate and
serial correlation in residual.
it = .71it-1 + 0.29 [0.75
6. Estimated FOMC Forecast-based Rule
Unemployment and inflation forecasts are
from semiannual “central tendency” of FOMC
forecasts, interpolated if necessary to yield 3qtr-ahead values; ut* forecast is from staff
memoranda. Inflation forecasts are adjusted to
core PCE deflator basis. Rule is estimated at
semiannual frequency, and projected forward
using Greenbook forecasts.
+ 1.45πt]+ 0.53gt-1
+ 1.03(yt+3|t – yt+3|t*) + 1.59πt+3|t]
+ 0.38gt-1
it = 0.48it-2 + 0.52 [0.43
– 2.09(ut+3|t – ut+3|t*) + 1.56πt+3|t]
7. Estimated TIPS-based Rule
πcomp5|t denotes the time-t difference between
5-yr nominal Treasury yields and TIPS.
it = 0.97it-1+ [–1.27 + 0.70πcomp5|t]
Sample begins in 1999 due to TIPS volatility
in 1997-8.
a
RMSE for rules with imposed coefficients is calculated setting π* = 1.5.
b
RMSE for TIPS-based rule is calculated for 1999:1-2005:3.
Class I FOMC - Restricted Controlled (FR)
(12)
Page 19 of 36
Futures market quotes suggest that investors are virtually certain of a
25 basis point firming of policy at this meeting, and surveys reveal that primary
dealers expect little change in the nature of the statement. Therefore, market prices
would likely be essentially unaffected by a 25 basis point increase in the funds rate and
the statement language as under Alternative B.
(13)
If the Committee wished to convey greater concern about upside risks to
inflation, it might prefer to combine a 25 basis point increase in the target funds rate
with the language included under Alternative C. The Committee may especially
favor this alternative if increases in energy and other costs were viewed as beginning
to unmoor inflation expectations, potentially starting an upward shift in inflation
dynamics that would be hard to reverse later. Even if inflation expectations remain
well anchored for a time, a sharper rebound in spending growth as rebuilding in the
hurricane-affected areas picks up steam may put excessive strains on resources. The
proposed statement drops the characterization of policy as accommodative, but it
indicates in the comments on inflation (row 3) that further policy firming likely is
necessary on the thought that the Committee might soon envision moving the real
funds rate past its neutral level—that is, to impose policy restraint. The sentence on
the balance of risks is also eliminated; the Committee might see that formula as
redundant or possibly misleading about the extent of upside inflation risks at present.
The final paragraph on the measured pace language is also dropped, allowing greater
flexibility for possible future adjustments of policy. The Committee may see this
more forceful tone as warranted in light of the backup in market interest rates,
increase in inflation compensation, and depreciation of the dollar in recent days,
which might be viewed as signs of the emergence of inflation jitters in financial
markets. Indeed, the Committee may prefer to raise the target funds rate 50 basis
points at this meeting in association with language similar to that under Alternative C
to underscore its determination to resist an increase in inflation.
Class I FOMC - Restricted Controlled (FR)
(14)
Page 20 of 36
Market participants would be surprised by the removal of the measured
pace and policy accommodation language and, perhaps, by the explicit indication that
additional firming was likely to be necessary. With a 25 basis point move and the
language proposed under Alternative C, short-term interest rates and the exchange
value of the dollar would likely rise, while stock prices would fall. If markets revised
down their outlook for longer-term inflation as a result of the statement, however,
longer-term interest rates might increase only a little. With a 50 basis point firming,
market participants would likely raise their sense of inflation risks and the near-term
path of expected monetary policy substantially; short- and intermediate-term market
interest rates would jump, the dollar would rally, and the stock market could sell off
sharply.
(15)
Committee members may wish to consider Alternative A if they think that
the recent moderate rates of core inflation are likely to continue and if they see the
outlook for the economy as especially uncertain because of the effects of the
hurricanes and elevated energy prices. Particularly if the Committee, like the staff,
views the real federal funds rate as in the vicinity of its equilibrium level, a pause in
policy firming might be seen as desirable, partly to await further readings on consumer
and business sentiment and spending. Such a pause may also be chosen if members
believe that the real estate market is in the process of softening, which heretofore has
been an important spur to household spending. Under this alternative, the
Committee might refer to “remaining” policy accommodation in the final risk
assessment paragraph. Markets would be surprised at the decision to leave the target
funds rate unchanged. Short-term interest rates would probably decline considerably
as markets lowered the probability of near-term tightening moves. Longer-term
interest rates might be little changed or even back up if investors saw the FOMC as
more tolerant than they expected of an increase in inflation. The foreign exchange
value of the dollar would likely fall, especially if inflation expectations deteriorated.
Class I FOMC - Restricted Controlled (FR)
Page 21 of 36
Other Language Alternatives
Committee members have recognized for some time that certain features of its
policy statement would not prove durable, not the least being its characterization
of policy as accommodative and its prediction that this accommodation can be
removed at a pace that is likely to be measured. The assessment that policy is
accommodative becomes increasingly problematic as the real federal funds rate
enters the range of plausible estimates of its equilibrium level. Moreover, the
Committee may feel it necessary to move the real funds rate beyond its neutral
level to unwind inflationary pressures or to roll back some of the rise in inflation
over the past couple of years. In doing so, the Committee might be reluctant to
switch its characterization of policy from accommodative to contractionary. Two
alternatives might be considered.
For one, if it is important to convey the sense that policy action will remain
gradual, the statement could replace the description of the stance of policy with
words describing the direction of its likely future action. In particular, the key
portion of row 5 could read: ". . . the Committee believes that policy firming can
continue at a pace that is likely to be measured."
(16)
For another, the Committee could drop rows 4 and 5 in favor of a formula for its
risk assessment. One such formula, for example, was proposed in a box in the
September Bluebook. In that structure, the Committee would provide separate
assessments of the risks to its two goals under the explicit assumption that the
stance of policy remains unchanged for the next few quarters.
Money and Debt Forecasts
(17)
Under the staff forecast, M2 is expected to expand 3¾ percent this year,
almost 2½ percentage points slower than nominal GDP, owing to rising opportunity
costs (Table 2). With short-term market rates assumed to be unchanged in 2006 and
2007, deposit rates should gradually catch up, partially unwinding the recent sharp
increases in the opportunity cost of money holding. As a consequence, M2 is
projected to accelerate to a 4½ percent pace next year and 5 percent in 2007, a little
below and above the growth rates of nominal GDP, respectively. Domestic
Class I FOMC - Restricted Controlled (FR)
Page 22 of 36
Table 2
Alternative Growth Rates for M2
(percent, annual rate)
Monthly Growth Rates
Sep-05
Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
2005 Q1
2005 Q2
2005 Q3
2005 Q4
2006 Q1
2005
2006
No Change
M2
25 bp Increase
50 bp Increase
M2
Greenbook Path
6.1
6.9
3.2
4.0
4.9
6.1
6.0
4.0
1.7
3.9
5.4
4.9
3.8
5.3
6.1
6.9
3.0
3.4
4.1
5.3
5.4
4.0
1.7
3.9
5.3
4.3
3.8
4.9
6.1
6.9
2.8
2.8
3.3
4.5
4.8
4.0
1.7
3.9
5.2
3.6
3.7
4.5
6.1
6.9
3.0
3.2
3.5
4.5
4.7
4.0
1.7
3.9
5.3
3.7
3.8
4.5
Growth From
2004 Q4
2004 Q4
To
Sep-05
Oct-05
3.5
3.8
3.5
3.8
3.5
3.8
3.5
3.8
Dec-04
Oct-05
Oct-05
Mar-06
3.6
4.9
3.6
4.3
3.6
3.7
3.6
3.8
* This forecast is consistent with nominal GDP and interest rates in the Greenbook forecast.
Class I FOMC - Restricted Controlled (FR)
Page 23 of 36
nonfinancial sector debt is expected to grow around 8¼ percent this year and then
decelerate to a 6½ percent pace in 2007. Less rapid home price appreciation tempers
mortgage borrowing by households, and business debt growth slows with the
deceleration of economic activity.
Class I FOMC - Restricted Controlled (FR)
Page 24 of 36
Directive and Balance-of-Risks Statement
(18)
Draft language for the directive and draft risk assessments identical to those
presented in Table 1 are provided below.
Directive Wording
The Federal Open Market Committee seeks monetary and financial
conditions that will foster price stability and promote sustainable growth
in output. To further its long-run objectives, the Committee in the
immediate future seeks conditions in reserve markets consistent with
MAINTAINING/increasing/REDUCING the federal funds rate
AT/to an average of around ____________ 3¾ percent.
Risk Assessments
A. The Committee perceives that, with appropriate monetary policy
action, the upside and downside risks to the attainment of both
sustainable growth and price stability should be kept roughly equal.
With underlying inflation expected to be contained, the Committee
believes that remaining policy accommodation can be removed at a
pace that is likely to be measured. Nonetheless, the Committee will
respond to changes in economic prospects as needed to fulfill its
obligation to maintain price stability.
B. The Committee perceives that, with appropriate monetary policy
action, the upside and downside risks to the attainment of both
sustainable growth and price stability should be kept roughly equal.
With underlying inflation expected to be contained, the Committee
believes that policy accommodation can be removed at a pace that is
likely to be measured. Nonetheless, the Committee will respond to
Class I FOMC - Restricted Controlled (FR)
changes in economic prospects as needed to fulfill its obligation to
maintain price stability.
C. None.
Page 25 of 36
Class I FOMC - Restricted Controlled (FR)
Page 26 of 36
Appendix Chart 1
Treasury Yield Curve
Spread Between Ten−year Treasury Yield and Federal Funds Rate
Percentage Points
4
Quarterly
2
+
0
−2
−4
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
+ Denotes most recent weekly value.
Note. Blue shaded regions denote NBER−dated recessions.
Treasury Yield Curve*
Percent
6.0
October 27, 2005
September 19, 2005
5.5
5.0
4.5
4.0
3.5
3.0
1
3
5
7
10
20
Maturity in Years
*Smoothed yield curve estimated from off−the−run Treasury coupon securities. Yields shown are those on notional par
Treasury securities with semi−annual coupons.
Class I FOMC - Restricted Controlled (FR)
Page 27 of 36
Appendix Chart 2
Dollar Exchange Rate Indexes
Nominal
Ratio Scale
March 1973=100
150
Monthly
140
130
120
Major
Currencies
110
100
90
+
80
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
+ Denotes most recent weekly value.
Ratio Scale
March 1973=100
Real
140
Monthly
130
120
Other Important
110
100
Broad
90
Major
Currencies
80
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
Note. The major currencies index is the trade−weighted average of currencies of the Euro area, Canada, Japan,
the U.K., Switzerland, Australia, and Sweden. The other important trading partners index is the trade−weighted
average of currencies of 19 other important trading partners. The Broad index is the trade−weighted average of
currencies of all important trading partners. Real indexes have been adjusted for relative changes in U.S. and
foreign consumer prices. Blue shaded regions denote NBER−dated recessions.
Class I FOMC - Restricted Controlled (FR)
Page 28 of 36
Appendix Chart 3
Stock Indexes
Nominal
Ratio Scale
1941−43=10
Ratio
45
2000
Monthly
1500
40
+
S&P 500
1000
35
30
500
25
P/E Ratio*
20
+
15
10
5
0
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
* Based on trailing four−quarter earnings.
+ Denotes most recent weekly value.
Real
Ratio Scale
1941−43=10
160
140
Monthly
120
+
100
80
60
S&P 500*
40
20
1960
1963
1966
1969
1972
1975
1978
1981
* Deflated by the CPI.
+ Denotes most recent weekly value.
Note. Blue shaded regions denote NBER−dated recessions.
1984
1987
1990
1993
1996
1999
2002
2005
Class I FOMC - Restricted Controlled (FR)
Page 29 of 36
Appendix Chart 4
One−Year Real Interest Rates
One−Year Treasury Constant Maturity Yield Less One−Year Inflation Expectations (Michigan Survey)*
Percent
8
Monthly
4
0
+
−4
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
* Mean value of respondents.
One−Year Treasury Constant Maturity Yield Less One−Year Inflation Expectations (Philadelphia Fed)*
Percent
8
Monthly
GDP Deflator
4
+
CPI
0
−4
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
* ASA/NBER quarterly survey until 1990:Q1; Philadelphia Federal Reserve Bank Survey of Professional Forecasters
thereafter. Median value of respondents.
One−Year Treasury Constant Maturity Yield Less Change in the Core CPI from Three Months Prior
Percent
8
Monthly
4
+
0
−4
1985
1987
1989
1991
1993
1995
1997
1999
2001
+ Denotes most recent weekly Treasury constant maturity yield less most recent inflation expectation.
Note. Blue shaded regions denote NBER−dated recessions.
2003
2005
Class I FOMC - Restricted Controlled (FR)
Page 30 of 36
Appendix Chart 5
Long−Term Real Interest Rates*
Real Ten−Year Treasury Yields
Percent
10
Monthly
8
Real rate using
Philadelphia Fed Survey
6
Ten−year TIPS yield
4
+
Real rate using
Michigan Survey
2
+
0
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Nominal and Real Corporate Bond Rates
Percent
14
Monthly
12
Nominal rate on Moody’s
A−rated corporate bonds
10
8
Real rate using
Philadelphia Fed Survey
+
6
4
Real rate using
Michigan Survey
+
+
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
* For real rates, measures using the Philadelphia Fed Survey employ the ten−year inflation expectations from the
Blue Chip Survey until April 1991 and the Philadelphia Federal Reserve Bank Survey of Professional Forecasters
thereafter (median value of respondents). Measures using the Michigan Survey employ the five− to ten−year
inflation expectations from that survey (mean value of respondents).
+ For TIPS and nominal corporate rate, denotes the most recent weekly value. For other real rate series, denotes
the most recent weekly nominal yield less the most recent inflation expectation.
Note. Blue shaded regions denote NBER−dated recessions.
2
Class I FOMC - Restricted Controlled (FR)
Page 31 of 36
Appendix Chart 6
Commodity Price Measures
Journal of Commerce Index
Ratio scale, index (1980=100)
140
130
120
Weekly
110
Metals
100
Total
90
80
70
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
CRB Spot Industrials
Ratio scale, index (1967=100)
380
360
340
320
Weekly
300
280
260
240
220
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
CRB Futures
Ratio scale, index (1967=100)
350
Weekly
300
250
200
1985
1987
1989
1991
1993
1995
Note. Blue shaded regions denote NBER−dated recessions.
1997
1999
2001
2003
2005
Class I FOMC - Restricted Controlled (FR)
Page 32 of 36
Appendix Chart 7
Growth of Real M2 and M3
M2
Percent
10
Quarterly
5
0
−5
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
M3
Percent
15
Quarterly
10
5
0
−5
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Note. Four−quarter moving average deflated by the CPI. Blue shaded regions denote NBER−dated recessions.
Gray areas denote projection period.
Class I FOMC - Restricted Controlled (FR)
Page 33 of 36
Appendix Chart 8
Inflation Indicator Based on M2
Price Level
Ratio Scale
140
Quarterly
120
100
Implicit GDP
price deflator (P)
80
Long-run equilibrium
price level (P*)
60
40
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
Inflation 1
2004
Percent
12
Quarterly
10
8
6
4
2
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
1. Change in the implicit GDP price deflator over the previous four quarters.
Note: P* is defined to equal M2 times V* divided by potential GDP. V*, or long-run velocity, is estimated
using average velocity over the 1959:Q1-to-1989:Q4 period and then, after a break, over the interval from
1993:Q1 to the present. For the forecast period, P* is based on the staff M2 forecast and P is simulated using a
short-run dynamic model relating P to P*. Blue areas indicate periods in which P* is notably less than P.
Gray areas denote the projection period.
Appendix Table 1
Class I FOMC - Restricted Controlled (FR)
Page 34 of 36
Selected Interest Rates
(Percent)
Short-term
Treasury bills
secondary market
Federal
funds
1
Long-term
CDs
secondary
market
Comm.
paper
Off-the-run Treasury yields
Indexed yields
Moody’s
Baa
Municipal
Bond
Buyer
Conventional home
mortgages
primary market
4-week
3-month
6-month
3-month
1-month
2-year
5-year
10-year
20-year
5-year
10-year
Fixed-rate
ARM
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
04 -- High
-- Low
2.34
0.92
2.08
0.73
2.28
0.87
2.63
0.96
2.51
1.04
2.29
0.97
3.13
1.49
4.10
2.65
5.03
3.84
5.64
4.68
1.57
0.40
2.28
1.38
6.90
6.00
5.45
4.73
6.34
5.38
4.27
3.36
05 -- High
-- Low
Monthly
Oct 04
Nov 04
Dec 04
3.93
2.19
3.71
1.86
3.93
2.31
4.21
2.63
4.20
2.50
3.98
2.24
4.43
3.11
4.48
3.58
4.73
3.97
5.04
4.28
1.85
0.98
2.05
1.50
6.44
5.64
5.13
4.72
6.15
5.53
4.91
4.10
1.76
1.93
2.16
1.62
1.91
1.95
1.79
2.11
2.23
2.05
2.33
2.50
2.04
2.26
2.45
1.79
2.01
2.22
2.57
2.86
3.02
3.35
3.52
3.59
4.24
4.32
4.34
4.92
4.95
4.94
1.00
0.93
0.97
1.76
1.68
1.65
6.21
6.20
6.15
4.99
5.06
5.03
5.72
5.73
5.75
4.02
4.15
4.18
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Weekly
Aug
Sep
Sep
Sep
Sep
Sep
Oct
Oct
Oct
Oct
Daily
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
Oct
2.28
2.50
2.63
2.79
3.00
3.04
3.26
3.50
3.62
2.02
2.36
2.64
2.63
2.62
2.82
3.09
3.33
3.21
2.38
2.59
2.80
2.84
2.90
3.03
3.29
3.52
3.50
2.68
2.85
3.09
3.14
3.17
3.22
3.53
3.78
3.80
2.61
2.77
2.97
3.09
3.22
3.38
3.57
3.77
3.87
2.33
2.49
2.67
2.84
2.97
3.11
3.27
3.47
3.64
3.23
3.39
3.74
3.67
3.65
3.65
3.90
4.06
3.96
3.70
3.76
4.15
3.99
3.84
3.76
3.98
4.12
4.01
4.32
4.25
4.59
4.42
4.22
4.07
4.25
4.34
4.28
4.82
4.65
4.92
4.78
4.59
4.38
4.50
4.56
4.55
1.15
1.10
1.27
1.21
1.25
1.37
1.64
1.69
1.40
1.72
1.63
1.77
1.69
1.65
1.67
1.88
1.89
1.70
6.02
5.82
6.06
6.05
6.01
5.86
5.95
5.96
6.03
4.92
4.87
5.01
4.93
4.83
4.77
4.85
4.90
4.94
5.71
5.63
5.93
5.86
5.72
5.58
5.70
5.82
5.77
4.12
4.16
4.23
4.25
4.23
4.24
4.40
4.55
4.51
05
05
05
05
05
05
05
05
05
26
2
9
16
23
30
7
14
21
28
05
05
05
05
05
05
05
05
05
05
3.52
3.55
3.50
3.54
3.68
3.80
3.82
3.68
3.76
--
3.33
3.39
3.33
3.26
3.10
3.12
3.30
3.45
3.50
3.64
3.54
3.51
3.50
3.48
3.52
3.52
3.61
3.74
3.86
3.91
3.81
3.72
3.72
3.78
3.84
3.89
4.01
4.09
4.16
4.21
3.81
3.81
3.77
3.84
3.91
3.99
4.05
4.10
4.14
4.19
3.52
3.54
3.55
3.61
3.70
3.72
3.74
3.79
3.84
3.93
4.04
3.89
3.87
3.92
3.98
4.13
4.24
4.28
4.30
4.38
4.06
3.93
3.92
3.99
4.04
4.15
4.24
4.32
4.34
4.42
4.28
4.16
4.20
4.27
4.31
4.39
4.46
4.54
4.56
4.64
4.50
4.40
4.48
4.55
4.58
4.62
4.67
4.75
4.78
4.84
1.63
1.42
1.38
1.38
1.39
1.47
1.60
1.68
1.66
1.79
1.82
1.68
1.68
1.70
1.71
1.75
1.86
1.96
1.92
2.01
5.91
5.84
5.96
6.03
6.06
6.12
6.19
6.29
6.31
--
4.87
4.83
4.87
4.96
4.98
5.04
5.06
5.11
5.13
--
5.77
5.71
5.71
5.74
5.80
5.91
5.98
6.03
6.10
6.15
4.56
4.48
4.45
4.46
4.48
4.68
4.77
4.85
4.89
4.91
11
12
13
14
17
18
19
20
21
24
25
26
27
05
05
05
05
05
05
05
05
05
05
05
05
05
3.72
3.36
3.75
3.77
3.82
3.71
3.71
3.77
3.76
3.76
3.74
3.75
3.81 p
3.36
3.49
3.49
3.47
3.49
3.57
3.56
3.44
3.44
3.45
3.71
3.70
3.71
3.74
3.70
3.75
3.77
3.87
3.86
3.86
3.85
3.86
3.93
3.93
3.90
3.88
4.10
4.10
4.09
4.08
4.17
4.15
4.15
4.16
4.16
4.20
4.21
4.21
4.20
4.08
4.09
4.11
4.11
4.13
4.13
4.15
4.15
4.16
4.17
4.18
4.19
4.20
3.83
3.74
3.77
3.82
3.82
3.83
3.82
3.88
3.85
3.90
3.92
3.98
--
4.26
4.28
4.29
4.30
4.32
4.30
4.29
4.30
4.26
4.30
4.38
4.43
4.41
4.27
4.31
4.33
4.35
4.37
4.36
4.33
4.34
4.28
4.33
4.42
4.48
4.45
4.48
4.53
4.57
4.58
4.59
4.58
4.56
4.56
4.48
4.55
4.63
4.70
4.67
4.68
4.74
4.79
4.79
4.80
4.80
4.79
4.78
4.71
4.76
4.83
4.90
4.87
1.65
1.70
1.70
1.69
1.66
1.65
1.66
1.68
1.66
1.72
1.79
1.84
1.81
1.92
1.98
1.96
1.97
1.94
1.92
1.92
1.92
1.90
1.95
2.01
2.05
2.02
6.19
6.28
6.34
6.35
6.34
6.33
6.33
6.32
6.24
6.30
6.35
6.44
--
--------------
--------------
--------------
NOTE: Weekly data for columns 1 through 13 are week-ending averages. Columns 2 through 4 are on a coupon equivalent basis. Data in column 6 are interpolated from data on certain commercial paper trades settled by the
Depository Trust Company. Column 14 is the Bond Buyer revenue index, which is a 1-day quote for Thursday. Column 15 is the average contract rate on new commitments for fixed-rate mortgages (FRMs) with 80 percent
loan-to-value ratios at major institutional lenders. Column 16 is the average initial contract rate on new commitments for 1-year, adjustable-rate mortgages (ARMs) at major institutional lenders offering both FRMs and
ARMs with the same number of discount points.
MFMA
p - preliminary data
Class I FOMC - Restricted Controlled (FR)
Page 35 of 36
Appendix Table 2
Money Aggregates
Seasonally Adjusted
Period
M2
1
2
nontransactions components
in M2
in M3 only
3
4
M3
5
Annual growth rates (%):
Annually (Q4 to Q4)
2002
2003
2004
3.2
7.4
5.4
6.7
5.5
5.2
7.7
5.0
5.2
6.0
3.4
7.0
6.5
4.8
5.8
Quarterly (average)
2004-Q4
2005-Q1
Q2
Q3
5.7
0.5
-0.6
-2.0
5.8
4.0
1.7
3.9
5.8
4.9
2.3
5.4
0.4
8.8
14.7
17.3
4.0
5.5
5.9
8.3
Monthly
2004-Oct.
Nov.
Dec.
1.0
13.8
-2.0
5.3
7.0
4.5
6.5
5.2
6.3
-6.7
-2.4
10.0
1.4
4.0
6.3
-8.0
6.4
6.0
-15.2
10.9
0.8
-17.5
14.8
-6.7
-2.0
3.4
2.8
3.7
-0.6
0.2
6.1
1.7
5.4
6.1
6.9
6.6
1.8
3.1
3.4
-2.6
7.5
6.9
2.9
9.5
9.3
13.5
8.3
3.8
21.3
15.6
19.8
7.1
26.9
23.2
14.2
6.7
4.6
3.8
6.5
5.3
10.6
3.5
12.5
11.9
9.4
1373.4
1374.3
1354.3
1371.0
1363.4
6482.8
6515.6
6525.1
6554.4
6587.9
5109.4
5141.3
5170.8
5183.4
5224.5
3180.0
3232.5
3251.6
3324.4
3388.8
9662.8
9748.2
9776.7
9878.7
9976.7
5
12
19
26
1364.7
1340.0
1358.3
1373.7
6569.2
6564.0
6599.8
6598.5
5204.5
5224.1
5241.5
5224.8
3383.9
3386.7
3372.6
3395.1
9953.1
9950.8
9972.4
9993.6
3
10p
17p
1396.8
1356.7
1347.6
6622.3
6610.8
6635.5
5225.5
5254.2
5287.8
3412.4
3416.5
3432.4
10034.7
10027.3
10067.9
2005-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sep.
Oct. e
Levels ($billions):
Monthly
2005-May
June
July
Aug.
Sep.
Weekly
2005-Sep.
Oct.
p
e
M1
preliminar y
estimated
Class I FOMC - Restricted Controlled (FR)
Page 36 of 36
Appendix Table 3
Changes in System Holdings of Securities 1
(Millions of dollars, not seasonally adjusted)
October 27, 2005
Treasury Bills
Treasury Coupons
Net Purchases 3
Net
Redemptions
Net
Purchases 2
(-)
Change
<1
1-5
5-10
Redemptions
(-)
Over 10
Net
Change
Federal
Net change
Agency
total
Redemptions
(-)
outright
holdings 4
Net RPs 5
ShortTerm 6
LongTerm 7
Net
Change
2002
2003
21,421
18,150
-----
21,421
18,150
12,720
6,565
12,748
7,814
5,074
4,107
2,280
220
-----
32,822
18,706
--10
54,242
36,846
-5,366
2,223
517
1,036
-4,850
3,259
2004
18,138
---
18,138
7,994
17,249
5,763
1,364
---
32,370
---
50,507
-2,522
-331
-2,853
2004 QIII
4,508
---
4,508
1,898
4,406
1,507
434
---
8,244
---
12,753
-1,787
782
-1,005
QIV
4,167
---
4,167
3,092
7,453
2,018
571
---
13,134
---
17,301
-5,956
1,728
-4,227
2005 QI
35
---
35
---
---
---
---
544
-544
---
-509
1,653
-3,454
-1,801
QII
QIII
2,010
4,743
-----
2,010
4,743
--1,298
3,495
5,025
1,708
1,118
1,015
90
1,305
757
4,914
6,774
-----
6,923
11,517
1,082
964
1,361
1,538
2,443
2,502
2005 Feb
Mar
35
---
-----
35
---
-----
-----
-----
-----
333
211
-333
-211
-----
-298
-211
2,163
1,746
-2,187
896
-24
2,642
Apr
May
--1,760
-----
--1,760
-----
1,200
2,295
470
898
230
---
-----
1,900
3,193
-----
1,900
4,953
385
-2,453
1,499
340
1,884
-2,113
Jun
Jul
250
---
-----
250
---
-----
-----
340
---
785
---
1,305
---
-180
---
-----
70
---
1,371
671
-606
2,413
764
3,084
Aug
Sep
2,751
1,992
-----
2,751
1,992
1,298
---
1,390
3,635
988
130
--90
757
---
2,919
3,855
-----
5,670
5,847
136
283
-581
-599
-445
-316
2005 Aug 3
Aug 10
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
-----
8,355
-7,150
-1,000
2,000
7,355
-5,150
Aug 17
Aug 24
1,244
1,249
-----
1,244
1,249
-----
1,390
---
--988
-----
-----
1,390
988
-----
2,634
2,237
-3,366
1,583
2,000
-2,000
-1,366
-417
Aug 31
Sep 7
258
14
-----
258
14
1,298
---
-----
-----
-----
757
---
541
---
-----
799
14
3,673
-1,709
-1,000
3,000
2,673
1,291
Sep 14
Sep 21
47
96
-----
47
96
-----
2,531
---
130
---
90
---
-----
2,751
---
-----
2,798
96
-3,235
4,279
1,000
-4,000
-2,235
279
Sep 28
Oct 5
1,565
291
-----
1,565
291
-----
1,104
1,193
-----
-----
-----
1,104
1,193
-----
2,669
1,484
1,009
-2,432
-4,000
---
-2,991
-2,432
Oct 12
Oct 19
54
317
-----
54
317
-----
-----
-----
-----
-----
-----
-----
54
317
-1,615
-874
-----
-1,615
-874
Oct 26
500
---
500
120
880
---
---
---
1,000
---
1,500
1,685
-2,000
-315
2005 Oct 27
1
---
1
---
---
---
902
---
902
---
903
1,693
-1,000
693
2,728
---
2,728
120
3,177
---
902
---
4,199
---
6,927
2,367
-7,000
-4,633
270.6
128.5
210.6
52.6
469.8
---
740.4
-12.2
11.0
-1.2
Intermeeting Period
Sep 20-Oct 27
Memo: LEVEL (bil. $)
Oct 27
1. Change from end-of-period to end-of-period. Excludes changes in compensation for the effects of
inflation on the principal of inflation-indexed securities.
2. Outright purchases less outright sales (in market and with foreign accounts).
3. Outright purchases less outright sales (in market and with foreign accounts). Includes short-term notes
acquired in exchange for maturing bills. Excludes maturity shifts and rollovers of maturing issues,
except the rollover of inflation compensation.
78.1
4.
5.
6.
7.
Includes redemptions (-) of Treasury and agency securities.
RPs outstanding less reverse RPs.
Original maturity of 13 days or less.
Original maturity of 14 to 90 days.
MRA:BEW
Cite this document
APA
Federal Reserve (2005, October 31). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_20051101
BibTeX
@misc{wtfs_bluebook_20051101,
author = {Federal Reserve},
title = {Bluebook},
year = {2005},
month = {Oct},
howpublished = {Bluebooks, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/bluebook_20051101},
note = {Retrieved via When the Fed Speaks corpus}
}